Marathon Oil (MRO)

Derivatives

We record all derivative instruments at fair value. A large volume of our commodity derivatives are exchange-traded and require few assumptions in arriving at fair value.

In our E&P segment, we have two long-term contracts for the sale of natural gas in the United Kingdom that are accounted for as derivative instruments. These contracts, which expire in September 2009, were entered into in the early 1990s in support of our investments in the East Brae field and the SAGE pipeline. The contract price is reset annually in October and is indexed to a basket of costs of living and energy commodity indices for the previous twelve months. Consequently, the prices under these contracts do not track forward natural gas prices. The fair value of these contracts is determined by applying the difference between the contract price and the U.K. forward natural gas strip price to the expected sales volumes under these contracts for the shorter of the remaining contract terms or 18 months. Adjustments to the fair value of these contracts result in non-cash charges or credits to income from operations. The difference between the contract price and the U.K. forward natural gas strip price may fluctuate widely from time to time and may significantly affect income from operations. A 10 percent increase in natural gas prices would decrease the fair value of these derivatives by $21 million, while a 10 percent decrease in natural gas prices would increase the fair value of these derivatives by $21 million in 2008.

Our OSM segment holds crude oil options expiring December 2009, which were designed to protect against price decreases on portions of future synthetic crude oil sales. The fair value of these options is measured using a Black-Scholes option pricing model that uses prices from the active commodity market and a market volatility calculated by a third-party service. A 10 percent increase in crude oil prices would decrease the fair value of these options by $4 million, while a 10 percent decrease in crude oil prices would increase the fair value of these options by $13 million in 2008.

Derivatives

We record all derivative instruments at fair value. A large volume of our commodity derivatives are exchange-traded and require few assumptions in arriving at fair value.

In our E&P segment, we have two long-term contracts for the sale of natural gas in the United Kingdom that are accounted for as derivative instruments. These contracts, which expire in September 2009, were entered into in the early 1990s in support of our investments in the East Brae field and the SAGE pipeline. The contract price is reset annually in October and is indexed to a basket of costs of living and energy commodity indices for the previous twelve months. Consequently, the prices under these contracts do not track forward natural gas prices. The fair value of these contracts is determined by applying the difference between the contract price and the U.K. forward natural gas strip price to the expected sales volumes under these contracts for the shorter of the remaining contract terms or 18 months. Adjustments to the fair value of these contracts result in non-cash charges or credits to income from operations. The difference between the contract price and the U.K. forward natural gas strip price may fluctuate widely from time to time and may significantly affect income from operations. A 10 percent increase in natural gas prices would decrease the fair value of these derivatives by $21 million, while a 10 percent decrease in natural gas prices would increase the fair value of these derivatives by $21 million in 2008.

Our OSM segment holds crude oil options expiring December 2009, which were designed to protect against price decreases on portions of future synthetic crude oil sales. The fair value of these options is measured using a Black-Scholes option pricing model that uses prices from the active commodity market and a market volatility calculated by a third-party service. A 10 percent increase in crude oil prices would decrease the fair value of these options by $4 million, while a 10 percent decrease in crude oil prices would increase the fair value of these options by $13 million in 2008.